Optimal Asset Market Operations

Yu-Ting Chiang and Piotr Żoch
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/

No 2025-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We characterize governments' optimal responses to asset market disturbances across a broad class of models with financial frictions. We show that the Ramsey plan can be achieved by a policy rule targeting a specific relationship between asset returns, regardless of the underlying disturbances. This relationship is determined by asset supply and demand elasticities that can be estimated empirically with standard identification strategies. Absent financial frictions, the optimal policy stabilizes spreads across all assets. However, in the presence of financial frictions, the optimal rule prescribes time-varying spreads to facilitate financial intermediation. We apply our framework to study the optimal design of asset purchase and lending programs, as implied by key empirical estimates of asset supply and demand elasticities.

Keywords: monetary policy; financial frictions; asset demand estimation; sufficient statistics (search for similar items in EconPapers)
JEL-codes: E2 E6 H3 H6 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2025-06-16
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DOI: 10.20955/wp.2025.014

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